Judge spares Amazon from Colorado sales tax reporting scheme

A federal judge has ruled that Colorado ran afoul of the US Constitution when it passed legislation forcing out-of-state retailers to report their customers' purchases to the state's tax authority.

Two decades ago, the US Supreme Court ruled that a state cannot require mail-order retailers to collect sales tax unless the retailer has a physical presence in the state. Under the commerce clause of the US Constitution, only Congress can regulate interstate commerce, and the Supreme Court ruled that forcing retailers to collect out-of-state sales taxes would create too much of a burden on interstate commerce. The courts left the door open for Congress to establish an interstate sales tax collection system. But while Congress has discussed the possibility, no legislation has been enacted so far.

State governments, frustrated to see a growing share of their taxpayers' spending going to online retailers they can't tax, have tried a variety of strategies to get the retailers—or their customers—to pay up. A number of states have passed laws classifying online retailers' affiliate programs as a physical presence in their states. Amazon.com has responded by shutting down its affiliate programs in those states.

In 2010, the Colorado legislature tried a different approach. It passed legislation requiring large retailers that do not collect sales tax to report the purchases of Colorado residents to state tax authorities. Like most states, Colorado has a widely ignored use tax, which consumers are supposed to pay on products they buy from out-of-state retailers. The state hoped that having their purchases reported to the state would scare consumers into paying the use taxes they owed.

But the Direct Marketing Association, which represents many businesses that would be subject to the law, sued in federal court. It argued that the reporting requirements were an unconstitutional burden on interstate commerce, and that under the Commerce Clause of the Constitution, only Congress had the power to compel out-of-state retailers to submit tax paperwork across state lines.

On Friday (as first reported by the Denver Post), Judge Robert Blackburn agreed. He found that the reporting requirement impermissibly discriminated against out-of-state retailers. While Colorado's law isn't targeted explicitly at non-Colorado businesses, it is targeted at businesses that do not collect Colorado sales tax, which amounts to the same thing.

Colorado's reporting law "imposes a differential burden on out-of-state retailers because the different burden is imposed precisely because the retailer is an out-of-state retailer" who is exempted by the Supreme Court from paying sales tax in Colorado, Blackburn wrote. "Only a change in the law by the Supreme Court or action by Congress can change the situation" and allow states to reach out-of-state retailers, he concluded.

Timothy B. Lee
Timothy covers tech policy for Ars, with a particular focus on patent and copyright law, privacy, free speech, and open government. His writing has appeared in Slate, Reason, Wired, and the New York Times. Emailtimothy.lee@arstechnica.com//Twitter@binarybits